Ares mercial Real Estate (ACRE) - 2021 Q4 - Annual Report

Financial Position and Debt - As of December 31, 2021, the outstanding balance under the Financing Agreements was $1.0 billion[34] - The company had $150.0 million outstanding under its Credit and Guaranty Agreement as of December 31, 2021[34] - The outstanding balance of CLO Securitizations was $864.8 million as of December 31, 2021[35] - The company expects leverage not to exceed a 4.5-to-1 debt-to-equity ratio[31] - The company had approximately $1.0 billion of outstanding borrowings under Financing Agreements and $864.8 million under CLO Securitizations as of December 31, 2021[79] - The company is subject to restrictive covenants in its Financing Agreements that may limit its ability to incur additional debt or make distributions to stockholders[82] - The company may be required to provide additional collateral or pay down debt under its Financing Agreements and future credit facilities[92] - The company anticipates utilizing additional bank credit facilities or repurchase agreements to finance its assets, which may involve risks related to collateral value and liquidity[93] - Access to financing sources may be limited, adversely affecting the company's ability to grow and maximize returns[94] - The company may incur significant additional debt through various financing arrangements, including bank credit facilities and structured financing arrangements[95] Market Conditions and Economic Impact - Market conditions are favorable for disciplined direct lenders, with expected strong demand for shorter duration and floating rate loans[29] - The COVID-19 pandemic has caused significant disruptions in global commercial activity, leading to increased volatility in equity and debt markets[49] - The pandemic has adversely impacted industries that serve as collateral for the company's loan investments, affecting borrowers' ability to meet loan covenants[50] - Changes in fiscal and monetary policies, including interest rate fluctuations, could adversely affect the company's financial condition and the demand for loans[84] - Significant fluctuations in interest rates and credit spreads could lead to increased financing costs and reduced income generation on investments[85] - Higher interest rates and widening credit spreads may decrease the number of loans originated and make refinancing less attractive[91] Investment Strategy and Risks - The company relies on its Manager for investment advisory services, with no employees of its own[28] - The company competes with various financial entities, including public and private REITs, banks, and institutional investors[38] - The company has formed subsidiaries to hold certain loans and engage in activities that could jeopardize its REIT status[37] - The company is subject to risks related to competition, interest rate changes, and potential conflicts of interest[45] - The company’s investments are subject to various risks, including economic downturns and declining real estate values, which could adversely affect its ability to pay dividends to stockholders[128] - The company may incur substantial losses if it cannot successfully restructure loans during workouts or foreclosures[170] - The company may invest in commercial mortgage-backed securities (CMBS) and collateralized loan obligations (CLO), which carry additional risks including potential losses from the securitization process[163] Regulatory Environment and Compliance - Changes in laws or regulations could require adjustments to business practices, negatively impacting operations and financial condition[59] - The implementation of Basel III standards may increase capital requirements and constrain financing options for the company[65] - The evolving regulatory environment surrounding securitizations may increase costs and risks associated with the company's business operations[105] - The company is currently exempt from being regulated as a commodity pool operator, but failure to comply with certain restrictions could result in additional regulations that may adversely affect its financial condition[117] - The company has submitted a claim for relief from registration requirements for mortgage REITs, which imposes limitations on its use of swaps, including that annual income from commodity interest trading must be less than 5% of gross annual income[119] Stockholder and Dividend Considerations - The company is required to distribute at least 90% of its REIT taxable income to maintain its REIT status, limiting available funds for investment[99] - The company has not established a minimum distribution payment level and may be unable to generate sufficient cash flows to make distributions to stockholders in the future[189] - Distributions for the years ended December 31, 2021, 2020, and 2019 exceeded cash flow from operating activities[193] - The company may use other sources of funds, such as offering proceeds and borrowings, to fund portions of future distributions[193] Asset Valuation and Concentration Risks - The fair value of certain portfolio investments may fluctuate significantly, leading to uncertainty in asset valuations and potential adverse effects on common stock value[160] - The valuation of real estate collateral is subjective and may lead to inaccuracies, potentially resulting in losses for the company[168] - The company may invest in non-performing real estate loans, which are subject to higher credit and market risks during economic downturns[169] - Concentration in specific property types or geographic locations may increase the risk of defaults and negatively affect net income and stock value[180] - The company does not have fixed guidelines for diversification, which may lead to a concentration in relatively few loans or property types, increasing the risk of defaults[126] Operational and Management Risks - The company has instituted a hybrid work-from-home arrangement, which may introduce operational risks, including heightened cybersecurity risks[57] - The board of directors has the authority to change investment strategies without stockholder consent, potentially altering the risk profile of the investment portfolio[58] - The company’s board of directors has the discretion to amend policies without stockholder approval, limiting stockholder control over major decisions[202] - The company conducts operations to maintain its exemption from registration under the 1940 Act, which imposes significant limits on its operations[205] Shareholder Structure and Changes - As of December 31, 2021, the company had 47,144,058 shares of common stock outstanding, an increase from 33,442,332 shares in 2020[187] - In 2021, the company conducted two registered underwritten offerings, selling a total of 13.5 million shares[188] - The company sold 137,237 shares under its "At the Market Stock Offering Program" during the year ended December 31, 2021, which allows for the sale of up to $100 million of shares[188] - The company is authorized to issue up to 450 million shares of common stock and 50 million shares of preferred stock without stockholder approval, which may prevent changes in control[204]